ITAT Surat Quashes LTCG Addition Based on Invalid DVO Reference under Section 55A

Background of the Dispute

The Income Tax Appellate Tribunal, Surat Bench, decided a group of eight appeals relating to Assessment Year 2012-13. The lead case was Jigneshkumar S. Modi (HUF) Vs ITO, and all matters involved co-owners of the same immovable property.

The controversy centred on the computation of long-term capital gains (LTCG) on sale of a plot of land during Financial Year 2011-12. The assessee, a HUF, claimed to have sold land along with other co-owners for a total consideration of Rs. 97,35,000/-. For purposes of computing LTCG, the assessee opted to substitute the cost of acquisition with the fair market value (FMV) as on 01.04.1981, relying on a report of a Government-approved registered valuer who adopted a rate of Rs. 380 per sq. mtr.

Subsequently, the Stamp Valuation Authority determined the Jantri value of the land at Rs. 2,43,51,300/-. This led the Assessing Officer (AO) to form the view that the full value of consideration had been understated and that Section 50C was attracted. Accordingly, a notice under Section 148 was issued, and reassessment proceedings were initiated.

During reassessment, the AO invoked Section 55A and referred the matter to the District Valuation Officer (DVO) to determine:

  • FMV of the property as on 01.04.1981 (for cost of acquisition), and
  • FMV as on 18.02.2012 (date of transfer) under Section 50C(2).

The DVO valued:

  • FMV as on 01.04.1981 at Rs. 10.19 per sq. mtr., and
  • FMV as on 18.02.2012 at Rs. 2,011 per sq. mtr. for land admeasuring 8,397 sq. mtrs.

The AO accepted the DVO’s valuation for Section 50C purposes and recomputed the indexed cost of acquisition using Rs. 10.19 per sq. mtr. instead of Rs. 380 per sq. mtr. claimed by the assessee. Considering the assessee’s co-ownership share of 9.09%, the AO worked out additional LTCG of Rs. 10,92,200/-, which was brought to tax under Section 143(3) r.w.s. 147.

The assessee carried the matter before the CIT(A) and thereafter before the ITAT, primarily questioning the validity of the reference to the DVO under Section 55A in the context of AY 2012-13.

The pivotal issue before the Tribunal was:

Whether the AO could validly refer the valuation of the capital asset to the DVO under Section 55A(a) when the assessee had adopted a higher FMV (based on a registered valuer’s report) than the value ultimately determined by the DVO, in the context of AY 2012-13, having regard to the pre-amendment and post-amendment text of Section 55A(a).

In essence, the assessee argued that:

  • For AY 2012-13, only the unamended Section 55A(a) was applicable.
  • Under the pre-01.07.2012 law, a reference to the DVO could be made only if the value claimed by the assessee was less than the FMV in the AO’s opinion.
  • Since the assessee’s declared value (Rs. 380 per sq. mtr.) was considerably higher than the DVO’s value (Rs. 10.19 per sq. mtr.), the statutory pre-condition for reference under the unamended Section 55A(a) was not satisfied.

The Revenue, however, relied on the amended Section 55A(a) (effective 01.07.2012), which substitutes the phrase “is less than its fair market value” with “is at variance with its fair market value”. According to the Department, since the reassessment and the reference to the DVO occurred after 01.07.2012, the AO was empowered to make a reference wherever the value declared by the assessee was at variance with FMV, irrespective of whether it was higher or lower.

Statutory Framework: Section 55A

Text of Section 55A (Post-Amendment)

The Tribunal reproduced Section 55A as applicable after the Finance Act, 2012 amendment. The relevant part states that the AO may refer the valuation of a capital asset to a Valuation Officer:

  • under clause (a) where the assessee’s declared value is based on a registered valuer’s estimate and, in the AO’s opinion, the value claimed is “at variance with its fair market value”; or
  • under clause (b) in other specified circumstances.

The crucial legislative change was the substitution in Section 55A(a) of the phrase:

  • “is less than its fair market value”
    with
  • “is at variance with its fair market value”

with effect from 01.07.2012.

The entire dispute hinged on:

  1. Whether this substitution was prospective or retrospective, and
  2. Whether it could apply to transactions that occurred in FY 2011-12 (relevant to AY 2012-13) even if the assessment proceedings and reference took place after 01.07.2012.

Findings of the CIT(A)

The CIT(A) upheld the AO’s action with the following reasoning: